the reduction of the corporate tax rate for corporate tax entities that are base rate entities; and

the increase in the income tax offset for unincorporated small businesses.

As a result, the Government’s ‘Ten-Year Enterprise Tax Plan’ — which was announced as part of the 2016–17 Federal Budget and originally legislated to be implemented from 2016–17 to 2026–27 — has now been shortened by five years, with the minimum corporate tax rate (25 per cent) and the maximum small business income tax offset (16 per cent) taking effect from 2021–22 instead of from 2026–27.

Note

The Act progressed through Parliament (the Bill was before Parliament for just two days) to Royal Assent without amendment.

Fast tracking the lower tax rates for base rate entities

Background

The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (the ETP Act), which received Royal Assent on 19 May 2017, amended the Income Tax Rates Act 1986 (the ITR Act) to progressively, over a 10-year period from 2016–17 to 2026–27, reduce the corporate tax rate for eligible companies with a turnover of less than $50 million from 27.5 per cent to 25 per cent.

The ETP Act also introduced the concept of a base rate entity (BRE), defined in s. 23AA of the ITR Act, as the criterion for the lower corporate tax rate. From the 2017–18 income year, only corporate tax entities which are BREs are eligible for the lower corporate tax rate. For the 2016–17 income year only, the 27.5 per cent tax rate applied to small business entities (SBE) as defined in s. 328-110 of the ITAA 1997.

The Act fast tracks the previously legislated reduction of the corporate tax rate for corporate tax entities that are BREs. The rate of 25 per cent will now apply from 2021–22 instead of from 2026–27.

Summary of acceleration of corporate tax cuts

Income year

Eligible corporate tax entities

< Aggregated annual turnover threshold

Tax rate — previous law

Tax rate — new law

2016–17

SBE

$10 million

27.5%

27.5%

2017–18

BRE

$25 million

27.5%

27.5%

2018–19

BRE

$50 million

27.5%

27.5%

2019–20

BRE

$50 million

27.5%

27.5%

2020–21

BRE

$50 million

27.5%

26%

2021– 22

BRE

$50 million

27.5%

25%

2022–23

BRE

$50 million

27.5%

25%

2023–24

BRE

$50 million

27.5%

25%

2024–25

BRE

$50 million

27%

25%

2025–26

BRE

$50 million

26%

25%

2026–27

BRE

$50 million

25%

25%

* All other corporate tax entities are taxed at 30 per cent.

Implications — Impact on maximum franking rates

For a distribution paid in the 2016–17 and later income years, the maximum franking credits that a corporate tax entity can attach to a distribution is worked out by reference to its ‘corporate tax rate for imputation purposes’. This is broadly the entity’s corporate tax rate for the income year of the distribution, worked out on the assumption that its aggregated turnover, BRE passive income and assessable income are equal to those amounts for the previous income year.

This means that the acceleration of the implementation of the lower corporate tax rates will also impact on the maximum franking credits that an entity can attach to its distributions.

This will mean that:

shareholders on marginal tax rates above that of the corporate tax rate will be subject to additional top-up tax on distributions they receive five years sooner; and

an even higher proportion of franking credits will be trapped in the company’s franking account, due to the reduction in the maximum franking rate — at a franking rate of 27.5 per cent, more than 11 per cent of previous tax paid by the company at the 30 per cent rate is already trapped in the franking account; when the maximum franking rate drops to 25 per cent, five years sooner, more than 22 per cent of previous tax paid by the company at the 30 per cent rate is trapped in the franking account.

Implications — Impact on R&D tax offset rates

The earlier than originally scheduled reduction of the corporate tax rate will also impact on the rate of a company’s R&D tax offset. From 1 July 2019, the rate of the R&D tax offset will be based on a premium added to the company’s corporate tax rate; a lower tax rate means that the company will be entitled to a lower R&D tax offset rate.

Carry forward tax offset rules

The Act also amends the ETP Act to accelerate the implementation of consequential amendments to the carry forward tax offset rules in Div 65 of the ITAA 1997.

The amount of the excess tax offset — which arises when a company receives franking credits that exceed its income tax payable for an income year — to be carried forward for BREs is calculated in accordance with s. 65-30 of the ITAA 1997, by reference to the lower corporate tax rate. When applying a carried forward tax offset to reduce any unused or net exempt income, the reduction is calculated in accordance with s. 65-35(3A) of the ITAA 1997 and is based on the lower corporate rate if the entity is a BRE.

Fast tracking the increase in the small business income tax offset

Background

The small business income tax offset (SBITO) was introduced in the 2015–16 income year (Subdiv 328-F of the ITAA 1997). It entitles certain individuals to a tax offset equal to five per cent of their basic income tax liability relating to their total net small business income, capped at $1,000 per taxpayer per year.

Broadly, an individual is entitled to the SBITO if, in relation to the income year, they are an SBE or they derive assessable income from an unincorporated SBE (i.e. a partnership or a trust). For the purposes of the SBITO, an SBE is defined by reference to an aggregated turnover threshold of $5 million rather than the standard SBE aggregated turnover threshold of $10 million.

The ETP Act amended s. 328-360 of the ITAA 1997 to increase the rate of the SBITO over a 10-year period from the 2016–17 income year (to eight per cent) to the 2026–27 income year (to 16 per cent).

The Act fast tracks the previously legislated progressive increases to the SBITO rate as set out in the table below. The amendments are intended to provide small businesses that do not pay the corporate tax rate with an increased offset rate that is broadly equivalent to the reductions in the corporate tax rate.

Summary of accelerated increases to the SBITO

Income year

SBITO rate – previous law

SBITO rate – new law

2016–17

8%

8%

2017–18

8%

8%

2018–19

8%

8%

2019–20

8%

8%

2020–21

8%

13%

2021– 22

8%

16%

2022–23

8%

16%

2023–24

8%

16%

2024–25

10%

16%

2025–26

13%

16%

2026–27

16%

16%

The SBITO will continue to be capped at $1,000 per individual per year.